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    FM2

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    asim ghosh
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    FM2

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    Download as docx, pdf, or txt
    16 views2 pages

    FM2

    Uploaded by

    asim ghosh
    file

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    You are on page 1of 2

    𝑘

    1. Sinking fund Annuity ( A ) = F { (1+𝑘)ⁿ−1} , where F = future value(accumulated sum)

    Here F = 50 Lakh
    k = 0.12
    n=7
    50∗0.12 50∗0.12
    Hence A = (1+0.12)7 −1 = (2.21−1)
    = 4.96 Lakh

    Hence company should invest Rs. 4.96 Lakh at the end of each year for 7 years in order to
    accumulate enough money to repay the debenture of Rs. 50 Lakh.

    Procedure of Loan Amortization and Capital Recovery :


    Loan Amortization
    Loan amortization is a loan repayment schedule which is calculated before loan repayment
    started. Amortization is used for long term loans like as mortgage, R&D expenses, purchase of
    goodwill, amalgamation, VRS payment etc. Loan amortization schedule can be prepared with
    the help of Capital recovery factor. Below illustration is given as example.
    Suppose ABC company borrowed a loan for 3 years of Rs 1 Lakh @ 10%from a bank to buy
    some machinery . If bank requires 3 equal en-of-year repayment , then the annual investment
    can be calculated from below formula
    100000 = A * PVFA 3,0.1
    100000 = A * 2.487
    A = Rs. 40209.00
    By paying Rs. 40209 every year ABC can completely repay the loan with 10% interest .

    Loan Amortization Schedule


    ___________________________________________________________________________
    End of year Payment Interest Principal repayment Outstanding Balance
    0 100000

    1 40209 10000 30209 69791

    2 40209 6979 33230 36561

    3 40209 3656 36553* 0


    *Round off value is taken

    Capital Recovery
    If someone made an investment today for a given period of time with a certain interest rate , he
    may like to know the annual gain. Annuity of the investment made today for a specified time at
    a given interest rate is known as capital recovery.
    The reciprocal of the present value annuity factor is called the capital recovery factor (CRF)
    (1+𝑘)ⁿ −1
    PVAn = A[ 𝑘(1+𝑘)ⁿ
    ] = A* PVIFA
    1
    A = PVAn * [ 𝑃𝑉𝐼𝐹𝐴]
    The term within the bracket is called as CRF
    Example :
    Let us XYZ firm plan to invest Rs . 10000 today for a period of 4 years . If the interest rate is 10%
    how much income per year required to recover full amount. This can be find out by the above
    formula :

    k = 0.1
    n=4
    PVAn = 10000
    𝑘(1+𝑘)ⁿ 0.1 (1+0.1)⁴
    A = PVAn [ (1+𝑘)ⁿ−1 ] = 10000 [ (1+0.1)4 −1 ] = Rs. 3155

    2. Present value of annuity = 12000


    Annuity amount for 10 years = 1800
    n = 10
    we have to find out rate of interest = k

    12000 = 1800 (PVIFAk,10)


    12000
    Hence PVIFAk,10 = = 6.667
    1800
    From the table of present value factor of annuity we can note the following
    a. Present value of annuity of Rs.1 equal to 6.71 at 8% rate of interest for 10 years.
    b. Present value of annuity of Rs.1 equal to 6.418 at 9% rate of interest for 10 years.

    Thus the rate of return lies between 8% to 9%.

    By interpolation we can obtain the rate of return as follows :


    6.71−6.667 0.043
    k = 8 +[6.71−6.418 ] = 8 + 0.291 = 8 + 0.15 = 8.15 %

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